Thursday, November 30, 2017

Investing ... and the Ultimate Retirement Strategy *

Eugene Fama is one of the major brains living in investment land. He's a gifted economist; he's written ground-breaking papers on markets and investing. Some of his words of wisdom:

Forget timing factors. That’s ridiculous. A company that I’m involved with [Dimensional Fund Advisors] does it passively. They just buy the whole value segment of the market, or the whole small segment of the market. They’re not trying to pick winners or losers. Timing is even more subject to error than picking individual securities.

There is no debate whether active management is better; it can’t be. That’s a matter of arithmetic, not a hypothesis. A simple way to think about it is: active managers can’t win at the expense of passive managers, because passive managers hold cap-weight portfolios of the entire market or of subsets of the market—which means, they don’t really respond to the actions of active managers.

Animation artists used to say to me, "I don't know f*ck all about where to put my money, but I've got to put it freaking somewhere so I can start saving for retirement. What should I do?"

I tried to give them a quick overview of markets and index funds. (You know, provide some math and history and basic investment mechanics.) But their eyes usually glazed over. I finally boiled my spiel down to a simple investment blueprint**:

If you're between 25 and 59 put everything in an age-appropriate Target Date Fund. When you hit 59 1/2 (and you are nervous about losing your stash), put 47% of your money into this, 47% of your money into this, and 6% of your money into this.

Pull money out of the third one; when you reach zero, rebalance back to 47%/47%/6%. Do not get tricky, do not overthink the strategy. Just draw down and rebalance, again and again. You'll outperform 90% of your fellow investors.

* Okay, I'm being facetious here. There is no ultimate strategy, just better plans and worse plans. This is one of the better plans. But it requires participants to stick with it.

** This plan is designed for IRAs, rollover IRAs, and 401(k) plans. You know, tax-sheltered accounts. You can do similar things with non-tax-sheltered investments, but the fund choices would be different.